PokerStars set for u-turn as private equity circles

14th June 2016 8:11 am GMT
It’s private equity versus David Baazov as PokerStars faces its second takeover in two years. Whoever wins, big changes lie in store for the world’s biggest poker company.The future of PokerStars is likely to become a little clearer after its annual general meeting in two weeks (June 28th). We can expect more clarity on whether David Baazov has emerged triumphant in his bid to take the company private or whether the private equity houses currently doing due diligence will win out. Baazov remains favourite as he already owns around 50 per cent of the company. In effect, the private equity houses will need to double whatever Baazov bids. However, the insider trading charges Baazov faces might yet foul his bid. The special committee that will judge the bids is loaded with Baazov’s close collaborators but they should resist any bias. They are duty bound to evaluate the bids and consider what is best for the company. That is going to be a tricky task. Baazov’s insider trading charges could linger for years as the Canadian courts slowly get round to hearing his case. In that time, the New Jersey Department of Gaming Enforcement could quite easily strip Stars of its operating licence. While most people might be inclined to judge someone innocent until proven guilty, that is not the DGE’s style. There are a whole string of former PokerStars executives that the DGE has passed unfit for a licence without a prosecution against them and without giving them the chance to defend themselves. The DGE will know as well as anyone that insider trading charges are notoriously difficult to prove. Most people do not leave a paper trail of evidence. It is a crime that features fairly low on the list of priorities of most criminal enforcement agencies. The DGE might be thinking that the Canadians must be pretty sure of the charges to bring them this far. If Baazov is no longer licensable in the US, then that either requires a change of owner, a change of strategy, or both.Amaya bought PokerStars on the promise of getting it licensed in the US. It achieved that aim but at some cost. However, the holy grail of an open market in California looks as far away as ever – and even if it comes, Amaya could be unlicensable. And if Baazov’s biggest backers on the original deal (Blackstone) are down on this prospect of a regulated US market (as their exit at this stage would suggest), then why should any of the other private equity bidders be interested. The reason is that, with or without Baazov and the US, PokerStars remains a cash cow that any private equity house with a relatively liberal attitude towards risk would be interested in buying. But rather than focusing on a tricky entry into the US and other regulated markets, the focus might turn to Russia and emerging markets in Latin America. The ongoing uncertainties in Russia do not make the deal any easier. If Russia bans online poker, the company loses huge value. Against this unpredictable corporate backdrop, there is a fair amount of upheaval on an operational level. Chief operating officer Israel Rosenthal, who was appointed in the wake of the DGE cull, quit during the last quarter, leaving the old guard withered further. Amaya significantly cut back the Dublin office when it integrated Full Tilt onto the PokerStars platform. And it is in the process of closing the Australia office of around 100 staff. PokerStars is used to this sort of stuff. This was the company that, lest we forget, spent several years (supposedly labouring) under the criminal indictment served by the US Department of Justice on its majority owner, chief executive and inspiration Isai Scheinberg. Remarkably, despite all this turmoil and reports of understandably low morale at HQ, PokerStars continues to push in the right direction. Recent first quarter figures revealed a company growing off the back of its move into casino games. The headline figure showed poker revenue down 10 per cent. However, it also sneaked an interesting snippet into its announcement, when it revealed that poker revenue for April was flat compared to a year ago. After several months of decline this was proof positive that poker might have turned a corner. Inside sources suggest that Stars has pushed poker back into growth since those figures were published. PokerStars was relatively late to the recreational player model that others have followed. But the changes it has made during the past two years are beginning to pay off. PokerStars has been smart not to pander to the VIPs, who unsurprisingly have discovered they are not so important after all, but it was not an easy task. The VIPs shout the loudest across the message boards every time a change is made that lessens their income. They are convincing too. VIPs consider themselves the site’s most important customers. To be fair, the VIPs had been told they were very important – the clue is in the name – for so long they started to believe their own hype. But unlike VIPs in other industries – airlines, nightclubs etc. – these VIPs also took a lot of money away from the company as well as putting it in. (Kinda unique that). They also scared off other customers – customers that were constantly told they were not very important. As business models go, it was certainly a strange one. Odd – when you see it in black and white – that it prospered for as long as it did. But that’s marketing for you. In reducing the benefits given to VIPs, PokerStars has been able to plough more money into recreational player promotions. And if that has driven some VIPs off the site then it has made it a nicer place for normal folk, who are playing for longer and, in turn, handing the company more rake. That rake has also been raised, which again annoyed the players formerly known as VIPs, but most customers hardly noticed. So PokerStars is ticking along better than it has since pre-Amaya days. Casino is going great guns and while sports betting is proving a harder nut to crack, it will surely come with time. Meanwhile, chief executive Baazov has his own struggles. Some insiders argue that the temporary loss of Baazov is no great loss for PokerStars. Baazov is not a poker scene legend like Scheinberg and most customers wouldn’t give a second thought to the identity of the chief executive of the website they use. Secondly, Baazov is not an operational CEO. He is the strategic mastermind. He is the man with access to big bucks finance. He does not decide on the amount of rake given to VIPs, for example. The responsibility for all that falls on the increasingly broad shoulders of PokerStars CEO and temporary Amaya CEO Rafi Ashkenazi. Now, Ashkenazi could be excused for feeling a little overwhelmed recently. He is a pretty cool character but if he has grown a little distant from his staff as the workload piles up, he could be forgiven. Forgiven by a returning Baazov perhaps – thankful to Ashkenazi for doing his job for a while. But if private equity wins out, they might not be quite so charitable.sah@gamingintelligence.com
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